Investor Bulletin: New Rules Improving Municipal Disclosure
The Securities and Exchange Commission approved rule changes on May 26, 2010 designed to improve the quality and timeliness of information available to investors about municipal bonds.
Why is the SEC making these changes?
Expanded disclosure will not only help investors make more informed decisions about investment in municipal bonds, but also help them protect themselves against fraud involving such bonds. The amended SEC rule is designed to provide investors with information about events that may affect the value of their municipal bonds or their tax status. The Rule also is designed to help municipal bond investors obtain information faster. The Rule previously was designed to result in issuers providing information in a timely way, but did not impose a firm deadline; in some cases, investors complained that disclosure came months after the fact, when it was less useful.
In addition, the SEC significantly narrowed a longstanding exemption for disclosure about demand securities, including variable rate demand obligations (VRDOs). VRDOs are long-term bonds whose interest rate adjusts frequently and whose holders have the option to redeem the bonds on short notice. The market for these securities is now quite large and can be volatile, as seen in the fall of 2008, underscoring the need for investors in such bonds to have access to timely information.
Who might be affected by the changes?
- Individuals who own municipal bonds directly or indirectly through mutual funds, trusts, or pension funds;
- Institutional investors who own municipal bonds;
- Money market mutual funds, which are the largest buyers of VRDOs;
- Brokers and others who sell or recommend municipal bonds to customers; and
- The states and local governments that issue municipal bonds and municipal bond conduit borrowers, such as non-profit hospitals, low and moderate income housing projects, and colleges and universities.
What are the changes?
SEC rules adopted in 1989 and amended in 1994 and 2008 required underwriters of municipal bond offerings to determine whether the issuer or obligated person had agreements in place to provide certain information in an electronic format to the Municipal Securities Rulemaking Board (MSRB). Prior to the May 26, 2010 rule changes, the information was limited to: certain annual financial and operating information and audited financial statements; notification of the occurrence of 11 specific events, if material; and notification if an issuer failed to file its required annual financial information on time.
The MSRB now makes certain information provided by the issuer or obligated person available to the public on its Electronic Municipal Market Access (EMMA) Internet site (www.emma.msrb.org). EMMA is a comprehensive, centralized online source for free access to official statements, continuing disclosure documents, advance refunding documents, and real-time trade price information on municipal securities.
The changes will do the following:
- Specify that disclosure be made within 10 business days of the occurrence of a listed event;
- Add four new disclosure events to the list;
- Provide for disclosure of six currently listed events whenever they occur – not only when an issuer determines them to be material; and
- Extend the same rules to new primary offerings of VRDOs. Previously-issued VRDOs will remain exempt.
What types of events will be disclosed?
Under the amended rule, information should be provided about any:
- principal and interest payment delinquencies with respect to the securities being offered
- unscheduled draws on debt service reserves reflecting financial difficulties
- unscheduled draws on credit enhancements reflecting financial difficulties
- substitution of credit or liquidity providers, or their failure to perform
- rating changes
- tender offers
- bankruptcy, insolvency, or receivership
- adverse tax opinions and IRS determinations that bonds may be taxable (including other material events affecting the bonds’ tax status)
In addition, the following six events will be disclosed if they are material:
- non-payment related defaults
- modifications to the rights of securities holders
- bond calls
- release, substitution, or sale of property securing repayment of the bonds
- information on mergers, acquisitions, or consolidations
- appointment of a successor or additional trust, or change in the trustee’s name
When will these changes become effective?
They will apply to primary offerings of municipal securities that occur on or after December 1, 2010.
The MSRB’s EMMA website: www.emma.msrb.org